It is Difficult to Predict Inflation...

Expectations are important for managing spending and price stability, when prices or inflation and expectations are high, lower spending could help contain or lower prices, though, when prices and expectations are low, higher spending could help increase prices. The RBI could forward guide that agents shall reduce or increase spending by forecasting prices even after the inflation target. It could help increase returns on investment. Because if prices increase or decrease as per expectations it could help time investment spending and consumption, too. If, everybody spends according to forecast or expectations about the prices to stabilise it there could be stability in the price level or inflation and profits could be maximised. If everybody follows the central banks' decision or forecast more price expectations could be actualised. 

 

Prices and growth depend upon spending which depends upon price or inflation expectations. Higher expectations increase the spending which could be self-fulfilling and increase current prices and vice versa. Disinflation or lower inflation expectations could also delay demand and increase supply reinforcing disinflation... and low growth... Stable inflation expectations could help prices and macro-economic and growth stability. 

INDIA has the highest inflation expectations among the major economies. Higher than the official inflation target of 4% in the medium term by the RBI. The divergence between the two is unexplained and could result from peoples' ignorance about the RBI's pledge. 11% inflation expectations are too much high compared to the official target. Inflation has barely increased 10% in the recent past.  

INDIA lacks a good social security system - healthcare and unemployment benefits - which are important for the well-being of all. 

The government has raised a windfall from oil duties in the past 5 yrs when the prices reached $25 per barrel which is an unprecedented amount. It did not let lower prices reach the public. Which also lowered productivity by increasing the transport cost and inflation and higher interest rates. 

Modi govt did not think of productivity and competitiveness when it reaped wind fall from excise duty and transport cost swelled for business and people. The credit of lower excise duty goes to the opposition. 

Lower inflation, higher real wages and incomes, and more purchasing power for the public. Lower inflation expectations could delay demand and increase supply reinforcing low current prices and higher purchasing power. The value of money shall increase over time. Higher interest rate expectations and lower demand and price expectations could increase supply which is what we want. Currently, at this point of time higher interest rates are good for the economy.

 

Too much rate hikes could increase NPAs of NBFCs. Last time when Urjit Patel increased interest rates in 2018 due to rising oil prices he had to resign. The animity between the govt and central banks over rate hikes is common. 

As far as economic policy is concerned Manmohan Singh's regime was a lot better. During Singh's period wages and incomes increased 107% and inflation increased 102% and during the BJP wages and incomes increased 29% and inflation increased 57%. Real wages and incomes suffered during the BJP. INDIA has become poorer compared to the last regime... 

In the face of heightened geo political tension both demand and supply may go down which means further delay in achieving the inflation target. If a competent organisation like the Federal Reserve cannot gauge prices, it is tough for anybody to predict what will happen to the markets under uncertainty. Stock markets too depend upon the demand and supply of the stocks which is exceedingly difficult to predict. They could change anytime. Bulls are followed by bears and bears are followed by bulls. 

If INDIA buy's Russian oil and add to its trade surplus and capacity to continue war on Ukraine, 
it is in the hands of the govt to tackle external problems, too, war has been the sole reason for higher inflation and inflation expectations. The govt is trying to boost exports when there is environment of gloom outside the country which is not going to work until the external situation improves. This time the problem is imports and depreciating currency and higher spending and debt. INDIA debt to GDP ratio has deteriorated during the last 8 yrs of BJP while it reduced under the UPA since 2004 to 2014 (tradingeconomics.com) ... Even the govt does not have the unemployemnt numbers, which is important for the RBI and policymaking and forming expectations about inflation... Labourforce participation rate has gone down from 64% during UPA to 46% under BJP. Unemployment has increased during BJP. LFPR has reduced 50% during BJP. 

If the discussion on unemployemnt (rate) is not done it is difficult to predict the inflation and inflation expectations. Phillips curve shows that an economy faces trade-off between inflation and unemployment. 

High public deficit and the resulting debt to GDP ratio and higher inflation and higher interest rate and interest rate payments pose a threat for macro-stability. Higher inflation and expectations point to reckless public spending. INDIA is among the worlds' worst inflation expectations nations. Debt and then more debt and taxes to pay debt could kick off a cycle of low private sector demand. 

INDIA is a super-power; it has the 2nd largest workforce after China and the world's fastest growing major economy. Its nominal GDP is around Rs 203 trillion and the US nominal GDP is $ 20 trillion. Discounting for the exchange rate INDIA's GDP is 10 times larger than the US GDP. Superpower is a state of Mind. It is independent to support its people. Its sovereignty is intact. There are also many poor people in the US around 10% people are still poor in the US. INDIA has more land area than the US. INDIA is a superpower though people do not realise it...

Demonetisation is the biggest scandal and a far-reaching example of extreme corruption during the current regime, nobody got nothing, and despotism is more dangerous than nepotism. 

If China could clock double-digit growth for more than a decade, INDIA too could achieve 9% GDP growth rate with conducive policy reinforcement. China has achieved this growth despite protectionism... INDIA is a Democracy and is more open and market-oriented. Free Market Economies tend to flare better than protected systems. Democracy means public welfare is top most priority and equality of oppourtunity, anybody could become President and PM.

 

Rate hikes by the Fed shall be seen as an attempt to contain the effect of rising inflation by rewarding savings to contain real returns and to save more to lower spending and inflation, those who would defer spending would also be rewarded through higher real wages... Rate hikes are a signal to lower prices and expectations... If people follow the Fed ie when it wants spending, both investment and consumption, people spend and when it wants less spending, people spend less, it would help control the price level or inflation would also increase returns. 

It is not that the Fed could increase interest rates indefinitely as people and investors could start defaulting on their debt obligations... There is a limit... NPAs could rise... 

Investors must realise that delaying demand could increase returns which could reinforce low current prices. Consumers and investors must realise that they would be rewarded if they delay spending and increase spending when prices go low. Fed is now determined to lower inflation and is ready to sacrifice some employment and growth and even a slowdown would not stop it, prices would come down in the short run that is a certainty. People must defer spending to gain from interest rate hikes and lower price expectations.